On Dec. 5, 2017, the European Council issued its conclusions on the EU list of non-cooperative jurisdictions for tax purposes. The conclusions also set forth the criteria and proposed sanctions for the countries blacklisted.

On Dec. 15, 2017, talks between the EU Council of Ministers, the European Parliament, and the European Commission reached a provisional agreement, amending and tightening the measures to the EU Fourth Anti-Money Laundering Directive (the Directive). On Dec. 20, 2017, the Permanent Representative’s Committee (COREPERl) adopted the proposal. Among other things, the amendments aim to increase transparency by establishing beneficial ownership registers for companies and trusts; and improve the safeguards for financial transactions to and from high-risk third countries.

The EU tax and the EU money laundering blacklists pose significant challenges to Caribbean jurisdictions with significant international financial services sectors. These developments follow a period of years in which banks in the metropole have terminated and/or limited access to their correspondent accounts in the Caribbean. This article discusses both the developments and the impact on Caribbean international financial services jurisdictions (CIFSJs).

EU tax haven list

The EU has developed its program and list of non-cooperative jurisdictions for tax purposes in order to fight tax evasion and avoidance and so that it can more effectively counteract external threats to EU members’ tax bases and third countries that “consistently refuse to play fair on tax matters.” Until now, EU members have had a hodgepodge approach to managing international financial centers which do not fulfill international tax standards. This approach has had limited effect. The Commission in its External Strategy for Effective Taxation suggested that a common EU list could be a more effective means of dealing with countries that encourage abusive tax practices.

The EU deferred its resolution for eight jurisdictions (Antigua and Barbuda, Anguilla, Bahamas, the British Virgin Islands, Dominica, St. Kitts and Nevis, Turks and Caicos, and the U.S. Virgin Islands) that were significantly harmed by the hurricanes in the summer of 2017. In early 2018, these jurisdictions must respond to the EU’s concerns. Special consideration was also given to the difficult situation of developing countries. “Least Developed Countries” without financial centers were automatically excluded from the screening process, while other developing countries without financial centers were given more time to address their shortcomings.

Criteria for assessing countries

EU listing criteria is supposed to be consistent with international standards and reflect the good governance standards that EU Members comply with themselves. These are:

Transparency: The jurisdiction in question should comply with international standards on automatic exchange of information and information exchange on request. In addition, the country should have ratified the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters (MAATM Convention) or signed bilateral agreements with all members to facilitate this information exchange. Until June 2019, the EU only requires two out of three of the transparency criteria. Thereafter, countries must meet all three transparency requirements to avoid being listed.

Fair Tax Competition: The jurisdiction in question should not have harmful tax regimes, which violate the principles of the EU’s Code of Conduct or OECD’s Forum on Harmful Tax Practices. The ones that choose to have no or zero-rate corporate taxation should ensure that this does not encourage artificial structures without real economic activity. At present, limited or no hard law exists obligating jurisdictions to follow fair tax competition. In addition, limited or no hard law exists on the definition of fair tax competition.

BEPS Implementation: The country must have committed to implement the OECD’s Base Erosion and Profit Shifting (BEPS) minimum standards. The rules of BEPS are relatively new and still in the process of implementation. BEPS is an effort by the OECD and G20 to develop new international tax rules. The process has occurred over a very short time period and is only in the beginning process of implementation.

Watchlist

The EU finance ministers agreed on an additional 47 jurisdictions to be included on a watchlist. The important element about the watchlist is that the EU can hold to the fire the jurisdictions who have elements in the regimes making them deficient and they have acknowledge the deficiencies and pledged to quickly remedy them.

Introduce substance requirements

The jurisdictions that have committed to develop and implement economic substance requirements alongside their zero tax rates are Bermuda, the Cayman Islands, Guernsey, the Isle of Man, Jersey, and Vanuatu. Although having a zero percent tax rate was not per se a criterion to be blacklisted, it was deemed an indicator of a jurisdiction that “facilitates offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction.”

Sanctions

Following Commission proposals, the EU list is now linked to EU funding, so that blacklisted jurisdictions lose access to the European Fund for Sustainable Development (EFSD), the European Fund for Strategic Investment (EFSI) and the External Lending Mandate (ELM).

Funds from these instruments cannot be made through entities in listed countries. Only direct investment in these countries (i.e., funding for projects on the ground) will be permitted, to preserve development and sustainability goals.

The Commission has a public country-by-country reporting proposal that includes stricter reporting requirements for multinationals with activities in listed jurisdictions. Proposed transparency requirements for intermediaries will require that multinationals with a tax scheme made through an EU listed country must automatically report it to tax authorities.

The Commission is also considering legislation in other policy areas, to determine where further consequences in the way of countermeasures for listed countries can be introduced. Besides the EU provisions, the Commission encouraged EU members to agree on coordinated sanctions to apply at national level against the listed jurisdictions. EU members have agreed on a set of countermeasures which they can choose to apply against the listed countries. These measures include more monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions. The Commission will support EU members’ efforts in the fashioning of a more binding and definitive approach to sanctions for the EU list in 2018.

Reactions by targeted countries

Most of the countries included on the blacklist reacted negatively. The Panamanian government characterized its inclusion “regrettable” and recalled its ambassador to the EU. Panamanian Ambassador Dario Chiru will have consultations in Panama about how to respond.

The Barbados Minister of International Business Donville Inniss expressed shock over its country’s blacklisting, characterizing the decision as both “unfortunate and unfair.” He explained that it had made the required commitments to either amend or eradicate its regimes that were not in line with EU specifications by the Dec. 5 deadline.

The South Korean government also said the EU had already agreed to accept the OECD/G-20’s assessment of harmful tax practices at a meeting of the Inclusive Framework on BEPS in February and hence the EU’s decision violates this agreement.

EU strengthens 4th Anti-Money Laundering Directive

The EU AML amendments strengthen transparency by establishing beneficial ownership registers for companies and trusts; prevent risks associated with the use of virtual currencies for terrorist financing and limiting the use of prepaid cards; increase the safeguards for financial transactions to and from high-risk third countries; and improve the access of Financial Intelligence Units (FIUs) to information, including centralized bank account registers.

In July 2016, the Commission presented the proposal after terrorist attacks and the revelations of the Panama Papers scandal.

Article 18 of the Directive requires obliged entities to apply enhanced customer due diligence (ECDD) measures when dealing with natural or legal entities established in high risk third countries. Article 9 of the 4AMLD authorizes the Commission to identify – by way of a delegated act – high-risk third countries with deficient AML/CFT regimes in place, and hence are an important risk for terrorist financing.

Nevertheless, EU members currently are not required to include, in their national regimes, a specific list of ECDD measures and therefore, heterogeneous implementation regimes of ECDD measures towards countries with deficiencies exist.

Harmonizing these measures will avoid or at least limit the risk of forum-shopping based on how jurisdictions apply more or less stringent regulations towards high-risk third countries. The ECDD proposed measures are fully compliant with the lists of such actions suggested by the Financial Action Task Force (FATF). They will be considered as a minimum set of requirements for all EU members to apply. The implementation of this complete set of ECDD will grant a more complete monitoring of the transaction as it will include scrutiny of the customer, the purpose and nature of the business relationship, the source of funds, and monitoring of the transactions. Additionally, through the systematic approval of the senior management, the process of the financial transaction will achieve higher scrutiny.

The amendments set forth a non-exhaustive list of countermeasures and mitigating measures EU members may decide to apply.

The directive requires that with respect to transactions involving high risk third countries, EU members must require obliged entities to apply all the following ECDD measures: obtaining more information on the customer; ascertaining more information on the intended nature of the business relationship; collecting information on the source of funds or source of wealth of the customer; finding information on the reasons for the intended or performed transactions; obtaining the approval of senior management for establishing or continuing the business relationship; performing enhanced monitoring of the business relationship by strengthening the number and timing of controls applied, and selecting patterns of transactions that require further examination; and requiring the first payment to be made through an account in the customer’s name with a bank subject to similar CDD standards.

In addition to the above-mentioned measures, the directive states EU members may require obliged entities, when dealing with natural persons or legal entities established in the third countries identified as high-risk third countries, to apply one or several mitigating measures; requiring financial institutions to apply additional elements of EDD; developing enhanced relevant reporting mechanisms or systematic reporting of financial transactions; and restricting business relationships or financial transactions with natural persons or legal entities from the identified country.

The directive authorizes EU members to apply one of four additional measures to third countries identified as high-risk third countries, such as refusing the establishment of subsidiaries or branches or repre

Analysis

With respect to the taxhaven blacklist, EU Tax Commissioner Pierre Moscovici has encouraged “strong and dissuasive measures” taken in the “very short term” against the blacklisted jurisdictions.

The EU intends to update the list at least once a year based on the continuous monitoring of listed jurisdictions, as well as those that have made commitments to improve their tax systems. EU members may also choose to screen more countries in 2018. An interim report will be prepared by mid-2018 to assess progress made.

From June 2019, more stringent transparency criteria take effect after a re-assessment of all jurisdictions. The EU listing criteria will also be updated in the future, to reflect new elements that EU members agree upon, such as transparency on beneficial ownership, as well as possible evolutions at international level. In this regards, the standards will be dynamic, just as the OECD standards on harmful tax competition and more recently tax transparency have continued to change.

Once a country has addressed the issues of concern for the EU and has brought its tax system fully into line with the required good governance criteria, it will be removed from the list. The Code of Conduct will be responsible to update the EU list, and recommend countries for de-listing to the Council.

The reactions by the countries listed indicate that, notwithstanding the EU statements about the detailed communications with the concerned countries and transparent process, many countries were surprised and disappointed at being listed.

In terms of the criteria for selection, the hard law is sketchy, especially insofar as fair tax practices. In addition, the law on transparency and BEPS is still emerging.

Global Witness criticized the list, stating that EU members were also contributing to financial wrongdoing by protecting the secrecy of shell firms and trusts on their territories. Rachel Owens, a representative from the Global Witness Brussels office, said the EU, before imposing sanctions against third countries, should correct the problems in its own members.” Among the EU countries with international financial sectors are: Austria, Cyprus, Ireland, Luxembourg, Malta, the Netherlands, and the U.K.

The EU explains the rationale for non-inclusion of EU members is that the list is meant to deal with only external threats to EU members and promote dialogue and cooperation with international partners. The EU believes different mechanisms exist to ensure fair and transparent taxation.

Notwithstanding the disputed inclusion of countries, the EU’s actions mean that the blacklisting will continue in the forseeable future, despite the understandings at the end of the Global Conference on Correspondent Banking, De-risking and the Labeling of the Caribbean as a Tax Haven. The Conference “called on member states of the Organization for Economic Cooperation and Development (OECD) and the European Union to align their individual transparency criteria in the framework of the Global Forum standards which are approved by 137 jurisdictions.”

With respect to the EU AML4D, the decision to act uniformly against countries with perceived strategic deficiencies in their AML and CTF laws shows a trend to take countermeasures against countries that do not comply with international standards. The difficulty is that FATF is already identifying such countries, so the decision by the EU also to do so exacerbates the proliferation of blacklists and standards, thereby contributing to additional loss of access to the formal international financial system by small countries. The latter often lack the capacity to meet new international standards, about which they learn later than the G-20 and OECD countries, because small countries are not members of the standard-setting bodies. In addition, because they do not have membership in the groups making the decisions, they lack the political wherewithal to successfully assert their positions. Another result is that, although the U.S. has non-compliant ratings from the 2006 and 2016 FATF evaluations and many U.S. states publicly solicit business to evade reporting, the EU is not likely to put either the U.S. or any states on its list of countries with perceived strategic deficiencies, thereby eroding the integrity of the standards and opening them to charges of discriminatory and illegal countermeasures.

Further loss and/or restriction of access to the metropolitan financial markets is likely to destabilize the CIFSJs, causing them to turn to non-Western countries and informal markets for transmitting funds. This phenomenon in turn is likely to lead to attempted migration to the metropolitan countries. Overall, the loss and/or restriction of access to traditional markets will have an adverse impact on the development of CIFSJs, several of which are struggling to recover from hurricanes and difficult economic circumstances.

Bruce concentrates his practice in tax controversy and international criminal law. His tax controversy work has included representing individuals on voluntary disclosures, audits, and litigation as well as consulting and serving as an expert witness in criminal trials for defendants and the U.S. Government. Since 1981, he has also represented foreign governments in international tax and financial services, including advising and helping negotiate income tax and tax information exchange agreements. He has also written a number of books and articles, and is an adjunct professor. Bruce is founder and editor of the International Enforcement Law Reporter.

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